Answer: Sell a one-year AUD cap.

## Explanation Among the given options, **selling a one-year AUD cap** would create the greatest credit exposure because: - **Option A (Pay fixed in AUD interest rate swap)**: This creates bilateral credit exposure, but the exposure is limited as interest rate swaps typically have lower potential future exposure compared to options. - **Option B (Sell USD against AUD in forward FX contract)**: Forward FX contracts have credit exposure, but it's typically lower than options since the exposure is based on the forward rate difference rather than unlimited upside potential. - **Option C (Sell a one-year AUD cap)**: This creates the highest credit exposure because: - As the seller of a cap, you have unlimited downside risk if AUD interest rates rise significantly - The buyer has the right but not the obligation to exercise the option - Your counterparty's credit risk is the risk that they won't pay you if the cap moves against them - Options typically have higher potential future exposure than swaps or forwards - **Option D (Purchase a one-year certificate of deposit)**: This has minimal credit exposure since you're essentially lending money to the bank, and with an AAA-rated counterparty, the default risk is very low. Therefore, selling the AUD cap (Option C) creates the greatest credit exposure due to the asymmetric payoff structure and unlimited potential liability for the seller.

Author: LeetQuiz .